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Friday, February 22, 2013

Another tricky morning for the eurozone

It’s been a somewhat less than pleasant morning for the eurozone. Firstly, the European Commission put out its latest economic growth forecasts, which do not make great reading for many countries. Here is a comparison between the EC's forecasts and the latest national government forecasts for growth:

As the table shows, there is a long list of countries which seem to be overestimating their growth for this year including: Italy, France, Spain, the Netherlands and Ireland.

We expect to see a series of growth revisions throughout the year on the part of national governments – in some cases such as Greece, we expect that the Commission forecasts will also prove overly optimistic (notably the figures used in the Greek budget are actually below the Commission forecasts). The figures also highlight the growing cracks in the Franco-German axis as the two countries diverge economically; this was reinforced by the starkly different PMI (business activity) figures yesterday.

The implications of these inflated growth projections are also becoming apparent. Nowhere is this clearer than in Spain, where the Commission highlights that, without additional measures, the Spanish government deficit in 2013 and 2014 will be 6.7% and 7.2% of GDP respectively. This compares to targets laid down by the eurozone of 4.5% and 2.8% respectively.

The Commission’s estimates of Greek unemployment also still seem unrealistic, at 27% and 25.7% in 2013 and 2014. In November 2012 unemployment reached 27% in Greece, according to the Greek statistics agency. With plenty of structural reforms still to go we expect this figure to increase further.

Secondly, the announcement of the repayment of the ECB’s second Long Term Refinancing Operation (LTRO) came in significantly lower than expected – 356 banks repaid €61.1bn compared to average expectations of €122.5bn. The steep slide in the euro exemplified the market response.

This highlights that underneath the recent optimism there is still significant fragmentation in financial markets and concerns over liquidity (as we have noted previously). Although impossible to tell conclusively, since these are just aggregate figures, we expect that many of the banks that have repaid were from ‘core’ eurozone countries, further exacerbating the differences between eurozone countries.

If you are looking for a silver lining, it could be that the rise in the euro has been halted for now, which may aid the competitiveness of the weaker countries, and that a potential de facto tightening of monetary policy has been avoided - this could have been a concern if banks repaid the LTRO and deleveraged rather than investing the collateral elsewhere.

The picture emerging from this morning’s data, then, continues to be a bleak one for the eurozone thanks to stalling growth across the bloc and banks hanging onto ECB liquidity. Beyond the headlines though, there is evidence of growing divisions as some of the core countries post growth and their banks repay ECB funding while peripheral countries find themselves in economic decline with banks surviving on ECB money but lending little.

Let me do a 5 minute estimate (for 2014).-Belgium. 1.5% is normal growth. Simply will not happen, with austerity/cutting and the Southern markets still being completely rubbish. 1.0% at best.As heavily linked to France huge downside risk, if France would go they are likley to go with it.-Germany could be about right 1.5-2.0%, basically the only economy that acts normal (like in a normal cycle).-Ireland. Could work but immaterial for the whole thing.-Greece. Not going to happen. Simply the bottom is not in sight so is likely (much?) later. And even if the bottom is close 5% in a year is not going to happen. 3-4% negative. Anyway immaterial for the total club.-Spain. Bottom not in sight, finance is not under control and structural measures not in place. 2.2% is a huge swing as well. Likely negative minus 1-2%, probably a fair bet. -France is always delayed will react later any way and is on the way down (also delayed compared to other, sentiment very low). Negative for 2013 and at best marginally up for 2014.Huge downside and very little upside could slide and if it does it will likley at least take Belgium with it.Possibility of some windowdressing tricks.-Italy see Spain (but likley not that bad). Anywway negative.-Cyprus, bottom still to come hard to see a 2.2% relative growth. Anyway immaterial.-Netherlands. Semi normal economy. But needs a lot of rebalancing. Simply cannot make sense of their policies: nivellating incomes; actively kicking RE prices already under pressure further down, makes no sense. Simply donot see them make the turn 2013-2014 with nearly 2%. Lower than that. Marginal growth few 1/10ths.-Portugal standard Southern story simply donot see them return to growth in 2014 and certainly not with alot of momentum, while the bottom is still at this moment not in sight. Pretty immaterial anyway.

Overall only growth of any magnitude is in Germany. No way enough to compensate for the negatives in Italy, Spain and likely France.Upside not much simply bottom is not in sight in the South and things are not under control there and structural measures keep being delayed. The first credible story that we are near the bottom in the South now I still have to hear. Downside. Considerable mainly the bottom could fall out under France. Taking Belgium with it and delivering a huge hit to the rest of the South. Not even mentioning Euro-exits via elections.In a nutshell in recession at least until and including (somewhere in) 2014.

I can't wait to put our politicians on trial here for gross incompetence, bankrupting our country, handing over our sovereign powers to an unelected bunch of Marxists, destroying our way of life and ruining our childrens' futures.

Labour are you listening? If I had my way these people will be hanging from the lamp posts. We have to have a large enough deterent to make sure our politicians never get the urge to do something like this again.